Tilly’s - Earnings Call - Q2 2026

Executive Summary

• Q2 2026 delivered mixed top-line but clear profitability progress: revenue declined 7.1% year over year to $151.3M, while diluted EPS was $0.10 vs. $0.00 last year and -$0.74 in Q1, marking the first profitable quarter since 2022, driven by higher product margins and lower SG&A.
• Comparable net sales fell 4.5% YoY, but cadence improved through the quarter and fiscal August comps turned positive (+0.9%); product margins expanded by 210 bps and inventories were 14.5% lower YoY, underscoring healthier inventory and pricing discipline.
• Q3 2026 outlook: net sales $134–$140M, comps -2% to +2%, SG&A ≈$47M, EPS loss of $0.35 to $0.23, with debt-free liquidity of ~$83–$86M; guidance embeds typical post–back-to-school seasonal slowdown seen in Sept/Oct the last three years.
• Stock narrative catalysts: first profitable quarter since 2022, positive August comps, continued SG&A discipline, and early AI/RFID investments (Impact Analytics, Nedap RFID) aimed at inventory optimization and omnichannel execution.

What Went Well and What Went Wrong

• What Went Well

  • Returned to quarterly profitability: EPS $0.10, first profitable quarter since 2022; operating income $2.7M vs. loss last year, aided by +210 bps product margin improvement and lower SG&A.
  • Healthier inventory and mix: inventories -14.5% YoY; margin uplift from higher initial markups and lower markdowns; management pursuing “chase” on winners vs. overbuying.
  • Demand indicators improved: Q2 comp trajectory improved from June into July; fiscal August comps +0.9% with apparel positive across categories; marketing reach up (TikTok followers ~169k, 4x YoY).

• What Went Wrong

  • Revenue still contracting: total net sales -7.1% YoY; comps -4.5% with both stores (-7.3%) and e-com (-6.6%) down; e-com pressured by a vendor distribution shift (~$1.8M August impact).
  • Structural deleverage: buying, distribution & occupancy (BDO) deleveraged 30 bps on lower sales despite $2.4M cost reductions; continued sensitivity to California wage inflation keeps store payroll under scrutiny.
  • Tariff risk remains fluid: FY25 net cost impact currently modest (~$0.5M), but FY26 impact likely larger though indeterminate given moving pieces and vendor pricing offsets.

Transcript

Speaker 3

... Good day, and welcome to the Tilly's second quarter two thousand and twenty-five earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your touch tone phone, and to withdraw your question, please press Star then two. Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson. Please go ahead.

Speaker 0

Good afternoon, and welcome to the Tilly's fiscal twenty twenty-five second quarter earnings call. Hezi Shaked, Co-Founder and Executive Chairman, Nate Smith, President and Chief Executive Officer, and Michael Henry, Executive Vice President and Chief Financial Officer, will provide some prepared remarks and then host a Q&A session. For a copy of Tilly's earnings press release, please visit the investor relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next thirty days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, September third, twenty twenty-five, and actual results may differ materially from current expectations based on various factors affecting Tilly's business.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal twenty twenty-five second quarter earnings release, which was furnished to the SEC today on Form 8-K, as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. I now turn the call over to Hezi.

Speaker 4

Thanks, Gar, and to all who are joining us today. First, I'd like to start by thanking the entire team for all their hard work since I reassumed the CEO position at the beginning of 2024. We believe we are just beginning to see the impact of those effective efforts, and it is encouraging to see. Next, I'm excited to welcome Nate Smith as Tilly's new President and CEO. He brings extensive apparel and consumer product industry experience to Tilly's, and I'm excited for this next chapter of the Tilly's story under his leadership. I'll remain highly engaged with the company, assisting Nate as he transitions into our company and thereafter. Nate, would you like to say a few words to introduce yourself?

Speaker 2

Thanks, Hezi. Yes, I'm excited to be here at Tilly's, and I'm excited about the prospects I believe this business has. I just arrived two weeks ago, and I'm getting settled in, getting to know the team and our processes here. I look forward to leveraging my industry experience to continue to improve and build upon the progress being made. I'll have more to say during our next earnings call once I've had a chance to get more familiar with things, but I'm excited to be here and work with the team as we aim to drive further improvements over time. I'll now turn the call over to Mike to share the details about our second quarter results and third quarter outlook.

Speaker 5

Thanks, Nate. We're excited that you're here with us, and we look forward to working with you. Now on to the details of our call today. We believe our second quarter results and start to the third quarter demonstrate that we are continuing to build incremental forward momentum as stabilization of our business continues. Our second quarter comparable net sales decrease of 4.5% was within our outlook range and represented a second consecutive quarter of sequential trend improvement from the fourth quarter of fiscal twenty twenty-four. We had some significant achievements during the quarter, including meaningfully improved product margins, significantly reduced inventory levels, improved inventory aging, and reduced SG&A expenses compared to last year's second quarter.

Our earnings per share of $0.10 beat our earnings outlook range for the quarter and represented our first profitable quarter since the third quarter of fiscal 2022, nearly three years ago. We believe these facts indicate that we are making progress toward improving our business, but there remains much more to do to return to profitability consistently over longer periods of time. On the marketing front, we continue to seek fun ways to build customer awareness and consideration for Tilly's, something that we were doing pretty well prior to Covid. We mentioned Travis Barker's in-store appearance at Irvine Spectrum in late May, in partnership with Hurley during our last earnings call.

In late July, we collaborated with the Mike Tyson Foundation, The Passion Project, and Tilly's Life Center to provide underprivileged kids with some life skill education and an opportunity to meet Mike in our Cerritos store, along with some of our loyalty members and other customers. We've quadrupled our TikTok following to over 169,000 followers since the start of the second quarter last year. Our content creation efforts have evolved and improved and have been aided by the launch of our TikTok Shop just a few months ago. As we improve our product assortment, our social, digital, and in-store marketing and engagement efforts are just as important to drive interest and consideration among our customer demographic, and we continue to prioritize resources here.

Moving on to the impact of tariffs, which remain volatile, we continue to expect a relatively modest impact on our product costs for the remainder of fiscal twenty twenty-five at this time. Our merchandising team has worked closely with all of our proprietary and branded partners to attempt to mitigate as much tariff impact on us as is reasonably possible. Currently, known net impacts on our product margins for the second half of fiscal twenty twenty-five are limited to just $500,000. The impact on fiscal twenty twenty-six is likely to be larger but is not clearly determinable due to the frequent change in tariff declarations and both our and our partners' continuous mitigation efforts. The impact of tariffs remains a fluid situation that can change at any moment, but this is what we know as of today...

Turning to our operating results for the second quarter of fiscal 2025 compared to last year's second quarter. Total net sales were $151.3 million, a decrease of 7.1%. We ended the second quarter with 232 total stores, a net decrease of 15 stores or 6.1% compared to a year ago. Total comparable net sales, including both physical stores and e-commerce, decreased by 4.5%. Net sales from physical stores decreased by 7.3% and represented 81.1% of total net sales, compared to 81.3% last year, while e-commerce net sales decreased by 6.6% and represented 18.9% of total net sales, compared to 18.7% last year.

Gross margin, including buying, distribution, and occupancy expenses, improved by 180 basis points to 32.5% of net sales, compared to 30.7% last year. Product margins improved by 210 basis points compared to last year, primarily due to the combination of higher initial markups and lower markdowns as a result of operating with reduced, more current inventory. Buying, distribution, and occupancy costs deleveraged by 30 basis points, despite being $2.4 million below last year in the aggregate, due to carrying these costs against lower total net sales. With 15 fewer stores than a year ago, occupancy costs decreased by $1.7 million. Distribution costs decreased by $0.6 million, primarily due to reduced temporary labor expenses.

Total SG&A expenses were $46.4 million, a decrease of $4.4 million and 50 basis points as a percentage of net sales compared to last year's second quarter. Primary expense reductions were attributable to reduced store payroll and related benefits of $1.9 million, lower non-cash asset write-off charges of $0.7 million, reduced e-com fulfillment labor of $0.5 million, and lower corporate payroll and related benefits of $0.4 million, among other smaller items. Pre-tax income was $3.1 million, or 2.1% of net sales, compared to a pre-tax loss of $73,000 or breakeven as a percentage of net sales last year.

Income tax benefit was $41,000, or 1.3% of pre-tax income, compared to $4,000, or 6.2% of pre-tax loss last year. Both years' income tax results include the continuing impact of a full non-cash deferred tax asset valuation allowance. This year's income tax benefit includes the refund of certain income tax credit carryforwards and state income tax carryback claims. Net income was $3.2 million, or $0.10 per diluted share, compared to net loss of $69,000 or breakeven on a per-share basis last year. On our debt-free balance sheet, we ended the second quarter with total liquidity of $114 million and no borrowings at any time, comprised of cash of $51 million and undrawn borrowing capacity of $63 million under our asset-backed credit facility.

Total balance sheet inventory was 14.5% lower than at the end of last year's second quarter. Additionally, our unit inventory aging was more current than at the end of last year's second quarter. Looking at our start to the third quarter of fiscal 2025, total comparable net sales for fiscal August, ended August 30, 2025, increased by 0.9% compared to last year, continuing our sequential improvement in sales trend from quarter to quarter that we have seen in fiscal 2025 so far. Comparable net sales from stores increased by 4.5%, while e-com net sales decreased by 12.1%.

The decrease in e-com net sales during fiscal August was primarily attributable to a distribution decision by one of our third-party brands that removed what was $1.8 million in net sales for us during August of last year. Absent this issue, our e-com net sales were otherwise just shy of flat for fiscal August. Based on current and historical trends, we estimate the following ranges for the third quarter of fiscal 2025. Net sales of approximately $134 million-$140 million, translating to a comparable net sales range of a decrease of 2% to an increase of 2%, respectively. SG&A of approximately $47 million, excluding any potential non-cash asset impairment charges. A near zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets.

Net loss of approximately $10.5 million-$6.9 million, respectively, and per share results of a net loss of $0.35-$0.23, respectively, an improvement compared to last year's loss per share of $0.43. We expect to end the third quarter with 230 total stores in operation after closing four stores and opening two new stores during the quarter. This compares to 246 total stores at the end of last year's third quarter. At this time, we expect to close two additional stores in the fourth quarter. We have 45 lease decisions remaining to be made by the end of the fiscal year, which may result in a few additional store closures which are not yet confirmed.

We expect to end the third quarter with a debt-free balance sheet and total liquidity of approximately $83 million-$86 million, comprised of cash and investments of approximately $20 million-$25 million, and available undrawn borrowing capacity of approximately $61 million-$63 million under our credit facility, reflecting the natural ebb and flow of our liquidity following the back-to-school season and the buildup of inventory in advance of the holiday season, which is consistent with historical patterns. We expect to remain a debt-free company throughout fiscal 2025. In closing, we believe our product assortment remains on trend, and we're building forward momentum toward improved business performance. We believe we are stabilizing our business, and with Nate's leadership just beginning, we're cautiously optimistic that a continuation of improved performance remains ahead. Operator, we'll now go to our Q&A session.

Speaker 3

Thank you. If you wish to ask a question, please press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Matt Koranda with Roth Capital. Please go ahead.

Speaker 1

Hey, guys. Thanks for taking the questions. Maybe just to start with Nate, congrats, and wanted to see if maybe you would be willing to discuss sort of the broader opportunity that you see at Tilly's, you know, sort of primary early priorities after joining?

Speaker 2

Thanks, Matt. Just started really week two here and had a great first week and dove in quickly as I met the team, spent a lot of time with the executive team. I think my initial impressions are, you know, the team has made great strides. When Hezi came back, and with Mike Henry and the executive team, they've made great strides, and so initially, you know, the emphasis should be on doubling down on those things that are working well, and then, of course, find those areas that we think we can make some course corrections, but, you know, again, it's pretty early, but I look forward to working with the team and over the course of the next few months, setting a path.

Speaker 1

Okay, great, and maybe just turning to the results and the outlook questions that I had. Maybe just first of all, really encouraging to see the sequential improvement in comp and the positive comp in August. Maybe just wanted to see, Mike, if you could talk about the progression during the second quarter of the comps that you saw and into August. Did things improve each month, and then just anything to call out in terms of the drivers of the August positive comp between traffic and ticket. I know you already mentioned there was a little bit of a dynamic going on in the e-commerce channel. Any more clarity you can provide also on that, in terms of product category that was in?

Speaker 5

All right. Pardon me, I'm writing notes as you're asking all those various questions, so I hopefully remember to address all of them. Let me know if I miss anything in particular. The Q2 cadence, you know, when we did our last earnings call, we mentioned that fiscal May was a minus 2%. June actually slowed down to a minus 7.6%, and then July bounced back to about a minus 3%, to finish off the quarter. Then as we transitioned into August, we were just below flat in the first week, flat in the second week, and then we've been positive for each of the last two weeks, to finish off the month at slightly positive overall.

All of our apparel departments moved positively in August, and that's what's really leading our business, the apparel side of things, and all elements of apparel being positive.

Speaker 1

Got it. And then, just on the call, you mentioned in terms of the e-commerce vendor category that that was in as well.

Speaker 5

Yeah, so not gonna name names there, you know, given the relationships that are involved. But it was something that was peculiar to the e-com business and a distribution decision made by a vendor of ours that essentially took a little bit of business away from us, and gave the metrics thereof, of the impact of that.

Speaker 1

Okay. All right, understood.

Speaker 3

Let me add to the fact that it's not only us, it's everybody else, too. Only our business-

Speaker 1

Okay, yeah.

Speaker 3

is very, very large.

Speaker 1

Got it. Okay, so this is a broader system-wide sort of change made by the-

Speaker 3

Exactly.

Speaker 1

vendor, not necessarily something individual from Tilly's.

Speaker 3

Exactly.

Speaker 1

Okay. All right. Understood.

Speaker 5

Yeah, it's a very good point, Hezi.

Speaker 1

Um-

Speaker 5

It was not just to Tilly's.

Speaker 1

All right. All right, great. The outlook, I guess, for the third quarter looks like it's factoring in kind of a flattish comp despite the growth you saw in August. Maybe can we talk a little bit about sort of why we're embedding the assumption of a little bit of sequential erosion? Is it just some conservatism given the consumer? You know, what are we seeing, I guess, or how do we expect the rest of the quarter to play out? And maybe it's just a consolidation of kind of back to school shopping that we've seen. But just wanted to see if you could unpack the dynamics there.

Speaker 5

Sure, Matt. So for each of the last three years, August, fiscal August has been our best performance of each of those years. And then we have seen a significant slowdown. Once you get past what I'll refer to as the need-based period of back to school, we've seen a slowdown in our business during September and October, relative to August, in each of the last three years. So the bottom end of our range is really contemplating if a similar sort of pattern occurs again for a fourth year in a row, and is more aligned with what our year to date comp of about minus 5%. That's how you'd get to the bottom end of minus 2%. We do believe our product assortment is definitely better and more current than it was at this time a year ago.

We're operating with a lower level of inventory overall and a more current inventory than we were at this time last year. So, we're cautiously optimistic that maybe we wouldn't see quite the size of fall off in September and October as we have seen in prior years, but wanna be conscious that that behavior has definitely been there, and we better contemplate that in terms of how we look at things going forward.

Speaker 1

Yeah. Okay, makes sense. Wanted to see if you guys could talk a little bit about the, the gross margin and the product margin improvement that you saw in the quarter. It sounds like a fair bit of that is just being cleaner on inventory. We got higher IMU, lower markdowns. But maybe if you could just talk about health of the current inventory and assortment, where it stands now. It looks like efficiency is looking better down, inventory is down on a per store basis, as well as being down on a gross dollar basis. But wanted to see if you could talk about the health of inventory there.

Speaker 5

Right. So the inventory definitely is healthier, and you just noted all the headlines about it. We purposely planned this year, as I said, I might have said it two quarters ago, that we were gonna run through this year with significantly reduced inventories all year long. That was a purposeful plan. We all put our minds together and believed that we had just been buying too much, to say it as plainly as I can, across all product areas, and took a really hard look at our past behaviors and tried to be a lot sharper in terms of our commitments for this year and tried to push ourselves more into a chase mode on things that are working really well and not to be so overbought on things that are turning very slowly.

So, we think we're seeing the benefits of that. When you see inventory down 14.5%, that's with a store count that's down 6%. So as you noted, it is lower on an overall store, store-by-store basis, and yet we're still able to produce a positive comp in August. Meaningfully improved product margins in the second quarter. We'd expect a similar type of behavior in terms of basis point movement and product margins in the third quarter. So pleased to see the fruits of that labor to try to be more efficient in our inventory management this year.

Speaker 1

Okay. Maybe just one other one on gross margins, if I could. With respect to tariffs and any vendor pricing requests or pressure that we've seen, maybe could you guys talk about, are you seeing any sort of pricing changes from vendors in response to tariffs? If so, kind of what is that looking like, and what does that sort of start to filter through the P&L?

Speaker 5

Everything is filtered into the outlook that we gave based on what we currently know. And, you know, all we can really tell you is what we're seeing in our go-forward purchase orders and the net differences in costs as well as retail prices. There are some instances where our third-party brands are moving price to consumer as well as cost to us, so then the net difference doesn't end up being much at all. That's why, you know, you might be surprised at how low we're seeing that net impact of $500,000 that I mentioned, and it not being something higher. It's because there's a whole bunch of things going on. Certain brands adjust price while they adjust cost.

We've changed sources for certain programs with sharper cost than what we might have had a year ago, so there's a lot of different moving pieces to this. It's not a simple answer.

Speaker 1

Yeah. Okay. All right, fair enough. And then just last one, I guess, on SG&A. Good cost containment there, and it looks like, I guess, the bulk of the savings on a year-over-year basis were from store labor. Is there more to come there? I guess I've always gotten the sense that that's a hard line item to move, but you guys moved it successfully. Maybe just talk a little bit about where you see opportunity for further cost containment there.

Speaker 5

Sure. We'll continue to see some store labor savings. We believe in both Q3 and Q4, we should see a similar dollar movement in SG&A below LY in the third quarter. Again, you know, you've been around us for a number of years. You've heard us talk about this over the years. With all the constant increases in minimum wage, particularly here in California, where almost half of our stores reside and all our distribution operations reside, those minimum wage impacts have an outsized impact on us relative to others that maybe aren't so heavily penetrated in California. So it has forced us to take a really hard look at our payroll matrix each and every year. I'll never claim that we're perfect at it or can't continue to refine it, and believe me, there's a lot of scrutiny on this.

We believe there still will be opportunity for us to improve upon that, and you'll continue to see lower store payroll dollars and some other expense savings in each quarter as we go forward for the rest of the year.

Speaker 1

Okay, great. I'll, I'll leave it there, guys. I appreciate all the answers.

Speaker 3

This concludes our question and answer session. I would like to turn the conference back over to Mike Henry for any closing remarks. Please go ahead, sir.

Speaker 5

Thank you, everyone, for joining us today. I will look forward to sharing our third quarter results with you in early December. Have a good evening.

Speaker 3

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.